FINANCING YOUR HOME

Qualifying

Which comes first, the home or the loan? Shopping for a home is easier when you know how much you can spend. Today’s lenders offer a wide variety of programs that will fit your needs, so familiarize yourself first with the various loan options available. Ask yourself a few questions:

• How quickly would you like to repay your loan? Within 15 years, 20 years, 30 years?
• How long do you expect to live in the house?
• How do you expect your income to evolve in the next few years?

Pre-qualification

This is a preliminary estimate of how much money a lender may be willing to loan you, based on the information you provided. Depending on your situation, your loan officer might also want to run a credit report. Pre-qualification will let you know how much you can spend even before looking for your perfect home, and will enable us to show you homes you know you can afford. Pre-qualification is based on your monthly debt, income, length of employment, etc. This is subject to verification by a loan processor.

Pre-approval

This is the smart way to shop for your home. Pre-approval will define exactly how much the lender is willing to loan you, so you can begin your house hunting with the assurance your financing is ready and waiting. It is like shopping with cash in hand.

The best time to think about home financing is before you find a house to buy. Remember, you can speed up the process by collecting and organizing, in advance, all the documents necessary to process your loan.

Down payment

How much is your down payment going to be? The down payment is the up-front cash you will pay toward the purchase of your home. Generally, the larger the down payment, the lower your monthly payments are going to be. Although down payments of 25 percent or more are common, home buyers can put down as little as 5 to 10 percent. However, charges for Private Mortgage Insurance (PMI) usually will be added to loans with less than 20 percent down, and this will increase your monthly payments.

Mortgage application

Applying for a mortgage is much like applying for any other kind of loan. Because of the amount borrowed and the lengthy term of the loan, however, the approval process is more complicated than for other types of loans and it usually takes more time. Your loan application will be evaluated based on three factors: your income and assets, your credit history and the appraisal of the property you plan to buy. While verifying your application, your lender will request a credit history and a property appraisal to help in the decision-making process.

Items needed for application

The information needed to process a loan application varies from case to case and with the type of mortgage. The following list is an example of what is typically needed, however, more information may be required (consult your lender). Remember, by bringing a complete set of documentation you may be able to speed up the loan application process:

• Filled-out loan application form
• Copy of sales contract with original signatures
• Applicant’s place of residence for at least the last two years
• Employer’s names, addresses and year-to-date pay stubs
• Information and account numbers on all cash assets: savings accounts, certificates of deposit, stocks, bonds, and cash values of life insurance policies
• Copies of verification of additional sources of income including pension, Social Security, alimony, child support, disability benefits, etc.
• Divorce decree, if applicable
• Social Security number
• Tax returns, including all schedules
• Information on liabilities: charge accounts, car loans, student loans & credit union loans
• If you are a veteran, discharge papers (Form DD-214) or certificate of eligibility

SELECTING A MORTGAGE THAT’S RIGHT FOR YOU

Whether this is your first home purchase or you are trading up or scaling down, finding the right loan package can be time consuming. There are many options available, and this is where together your loan officer and RE/MAX Equity Group agents can help you make the right decision. It will facilitate the process if you have the information ready on your income, etc. My Monthly Mortgage Budget Worksheet will assist you in your preparation, as well as answer some preliminary questions on the different types of loans available.

Click here for a monthly mortgage budget worksheet

Adjustable rate mortgage

When is an adjustable rate mortgage the best choice?

When you plan to be in your home for just a few years: Given the lower initial rate on an adjustable rate mortgage (ARM), your payments for the first few years often add up to be less than what you would have paid on a fixed rate loan for the same period of time.

If your income is likely to increase and you feel you will be able to afford potentially larger mortgage payments in the future: You can maximize your purchasing power right away with an ARM and grow into higher mortgage payments when you can better afford them.

When you want to qualify for a larger mortgage amount: Because of the lower initial interest rate, you can qualify for a larger mortgage amount than would be possible under a fixed rate plan.

If you feel rates will come down in the future…If rates do in fact drop, the rate on your ARM may decrease on the adjustment date without your having to pay any of the costs associated with refinancing. Additionally, borrowers who have chosen the convertibility option may be able to switch to a fixed rate loan that has a better rate than was possible at the time of their closing.

If you have a special need for ready cash over the next few years…Perhaps you have educational or medical expenses, investments or other financial planning costs that need to be addressed right away. You can choose an ARM loan to minimize your monthly mortgage obligation, which will help provide you with the extra money you require.

Fixed rate mortgage

Confidence and flexibility

The fixed-rate mortgage is the traditional form of home financing. Fixed rates offer borrowers payment consistency and security, the main reason the majority of homeowners continue to choose this form of financing. Principal and interest payments remain constant. The first payment is the same as the last. Even though the rate is “fixed,” the fixed-rate loan is far from rigid.

10, 15, 20 and 30-year terms

Most fixed-rate loans are paid over a term of 30 years. However, you may also choose a mortgage with a 20-, 15- or 10-year payback schedule. You might think this would substantially increase the payment. The fact is, the monthly obligation for P&I rise only moderately, but interest costs during the life of the loan are drastically reduced. For example, for a $100,000 loan at an 8% fixed rate, the monthly P&I payment and overall interest cost would be:

They are not for everybody. Not all borrowers can afford or will want to make the higher payments. You should consider your personal and financial situation before you choose a term. First-time buyers and young, middle-income families benefit from the lower payments of the 30 year mortgage. This helps them qualify for a larger loan amount, keeping monthly mortgage costs down. Repeat and middle-aged borrowers who may have higher incomes often prefer shorter terms. Fast equity buildup means homes that are paid for by retirement age.

Additional principal payments

There is seldom, if ever, any penalty for making additional payments to principal. By doing so, you will automatically reduce the term and interest cost of your mortgage. For example, on a 30-year fixed-rate loan of $100,000 with an 8% rate, the monthly P&I payment is $734. Increasing the payment only $50 a month will pay off the loan in less than 24 years rather than 30, saving $53,564.48 in interest. Making additional principal payments, periodically or on a regular basis, is an excellent option if you’d like to have your home paid for in less than 30 years but can’t afford the higher payment required by a shorter term loan.

Buydowns

You can lower your monthly payment for the first few years. Your monthly payment will increase annually at a predetermined pace until it reaches a level equal to the amount required by the loan’s fixed interest rate. For example, for a 30-year fixed-rate loan of $100,000 at 8%, a “2/1” buydown makes the following possible:

1st-year payment: $600 (equal to 6% rate)
2nd-year payment: $665 (equal to 7% rate)
3rd-year payment: $734 (equal to 8% rate)

Some advantages of a fixed rate loan with a buydown

You always know exactly what your payments will be from year to year and exactly when those payments will change. Depending on the type of buydown, the buydown payment changes annually only one, two or three times. The payment on a buydown does not go up more than 1% a year, making the increases less dramatic and more manageable than those of an adjustable rate mortgage (ARM). You may qualify for a higher loan amount than you might otherwise have at the current fixed rates.

Click here for FAQs about mortgages